Invoice factoring vs. business lines of credit
The basics of invoice factoring and business lines of credit
- Business lines of credit allow businesses to borrow as much or little as they like up to a limit.
- Invoice factoring allows businesses to sell their outstanding invoices at a discount.
- Business lines of credit tend to be less costly than invoice factoring, but can be more difficult to qualify for.
- Invoice factoring is typically a quicker way to get cash than a line of credit, and can be used to improve cash flow.
There is an array of financial products available to help fund your business. But it can be a headache deciding which products fits your needs.
Two options you may have heard of include business lines of credit, and invoice factoring. Both products provide flexible funding for businesses, but each also comes with its own pros and cons. So, which one is right for your business?
A business line of credit is a type of revolving credit, similar to a credit card. The credit line allows the business to borrow as much or as little as it needs, up to a set limit. As the business pays down the outstanding balance, it can reuse the credit, up to the limit, over and over again.
Invoice factoring is a financing product that allows a business to sell its outstanding invoices to an invoice factoring company, also known as the “factor.” Invoice factoring is technically not a loan. Rather than paying interest, the borrower pays fees in exchange for a cash advance.
When deciding between the two options, there are a number of aspects that should help inform your decision. Here are some of the main ones to take into consideration.
Business lines of credit tend to be one of the least expensive ways to borrow money. In fact, the interest rate on a line of credit may be lower than a business loan and some other options for borrowing money. Invoice factoring tends to be a more expensive way to borrow money, and if your customers are late paying the factor, it could cause your APR to increase. Be sure to read the fine print before signing any kind of agreement.
Though business lines of credit tend to be less costly than invoice factoring, that also makes them more difficult to qualify for. In fact, one of the reasons some businesses gravitate toward invoice factoring as a financing option is because they do not qualify for other options, such as a line of credit or a business loan. Further complicating matters, some banks offering business lines of credit include stipulations that the line can be closed if there are any changes to your credit profile.
Time to Fund
Both a business line of credit and invoice factoring can get you much-needed cash relatively quickly. The exact amount of time it will take for funds to be available depends on the financial institution and the individual products, but both can be funded anywhere from a matter of days to weeks. One advantage of invoice factoring is that it is often used to improve cashflow when customers are slow to pay their invoices. If you would miss out on business because you don’t have the cashflow to meet demand, invoice factoring could be a good option.
A business line of credit or invoice factoring are both viable options for financing a business. Just be sure to research both options and weigh their advantages against the needs of your business. Read the fine print and be aware of any hidden fees.